The US Federal Reserve kept the rate at 5.25–5.5%

Following the results of the January two-day meeting that ended on Wednesday, the US Federal Reserve kept the rate at 5.25–5.5%. The regulator abandoned the wording about the need to further tighten monetary policy, replacing it with a phrase assessing the prospects for a rate cut. This, however, will not happen until the regulator is convinced of a “sustainable” movement of inflation towards the target of 2% – high economic activity and the state of the labor market can slow down this process. Market participants, however, are expecting a rate cut at the next regulator meetings.

US Federal Reserve Open Market Committee following its January meeting didn’t change the rate, keeping it at the level of 5.25–5.5%. The last time the rate was raised was in July – since then, every Fed meeting has been accompanied by a comment from the regulator that further steps on the rate will depend on incoming data. And according to the results last meeting Fed Chairman Jerome Powell said the regulator is “likely at the peak, but does not want to rule out the possibility of additional tightening” of monetary policy.

On Wednesday, the Fed again changed its assessment of economic activity, indicating that it is expanding at a “significant pace” (growth slowed in December after a strong third quarter), noting that job growth is strong, but has slowed compared to the beginning of the year. , saved. The most important changes are the indication that the risks of meeting employment and inflation targets are “shifting towards a better balance”, as well as the long-awaited change in language about the need for further tightening of policy, which has now been replaced by an assessment of the prospects for a rate cut, although the process will not begin. until the Fed is confident that inflation is approaching its 2% target.

Market participants do not fully believe the “containing” rhetoric of the Fed and expect that the regulator will begin to reduce rates in March and will do this at each subsequent meeting until it lowers the rate to 4–4.25%.

In the dot plot with forecasts of committee members, published in December, we recall that a reduction in rates to the level of 4.5–4.75% this year and to less than 3.5% in 2025 is included. Expectations have shifted significantly from the last meeting, when market participants expected the Fed to maintain its current high rate until June.

Inflation at the end of 2023 has already slowed to 3.4% (in December there was an increase of 0.3% against 0.1% a month earlier), while the contribution of food to price growth was positive (prices rose by 2.7%), and energy – negative (minus 2%). Excluding energy and food (core inflation), prices rose by 3.9%, the monthly increase in December was similar to November (0.3%). The consumer spending deflator, which the Fed mostly focuses on, showed an increase of 2.6% in December, as in the month before; excluding energy and food, price growth slowed from 3.2% to 2.9%. Unemployment in December remained at the same level (3.7%), and the number of jobs created increased – from 173 thousand to 216 thousand, which does not yet allow us to talk about a cooling of the labor market.

Capital Economics expects core inflation to slow to 2% by the middle of the year (the Federal Reserve’s forecast for this year is 2.4%), rental and other services will have a disinflationary impact, and considers the medium-term risks of renewed inflation growth in the center to be “quite low.” “- even if demand remains high against the backdrop of lower rates, the resumption of price growth will be hampered by the ability to increase supply.

Geopolitical concerns may push energy prices higher, but with economies generally growing weaker, demand for commodities remains subdued, preventing sustained price increases. In the long term, Capital Economics expects that inflation will be pressured by productivity growth from the introduction of artificial intelligence technologies, with the opposite effect being the aging population and the green energy transition.

Tatiana Edovina